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Brazil’s Prices Rise More Than Expected for Eighth Month

Brazil’s inflation in mid-February exceeded economists’ forecasts for the eighth consecutive month, adding pressure on the central bank to raise interest rates. Swap rates rose.

Prices as measured by the IPCA-15 price index rose 0.68 percent from Jan. 16 through Feb. 14, the national statistics agency said today. The median estimate from 38 analysts surveyed by Bloomberg was for a 0.62 percent increase. Annual inflation accelerated to 6.18 percent from 6.02 percent the previous month.

Inflation has exceeded the central bank’s 4.5 percent target for more than two years as Dilma Rousseff’s government spurred demand by extending tax breaks for consumer goods and pressuring banks to lower lending rates. With inflation running faster than Chile, Peru, Colombia and Mexico, the bank’s ability to keep its benchmark lending rate at a record low 7.25 percent to boost growth is being put to the test.

“Today’s number shows inflation is very worrisome, it remained rather high even with the reduction in electricity rates,” Newton Rosa, chief economist at SulAmerica Investimentos, said by telephone from Sao Paulo. “Inflation is distancing itself more and more from the center of the target and without a doubt could prompt the central bank to act.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose six basis points, or 0.06 percentage point, to 7.73 percent at 9:15 a.m. local time. The real strengthened 0.3 percent to 1.9664 per U.S. dollar.

’Showing Resistance’

“It is unrealistic to imagine that inflation will converge to 4.5 percent in 2013,” central bank director Carlos Hamilton told reporters yesterday in Belo Horizonte. “Inflation is showing resistance in the first half and will tend to fall in the second half.”

The central bank is signaling a “conditional commitment” to raise rates if inflation does not fall in the second half of the year as it expects, Tony Volpon, head of emerging market research for the Americas at Nomura Securities International Inc., wrote in a note on Feb. 19

Price increases through mid-February were led by education, which rose 5.5 percent due to rising tuition at the beginning of the school year. Food and beverage prices jumped 1.7 percent.

Brazil’s gross domestic product expanded 1 percent last year, the central bank estimates, down from 2.7 percent in 2011 and 7.5 percent in 2012. Economists in the most recent central bank survey reduced their inflation outlook for this year, to 5.7 percent, after six straight weeks of raising their forecasts. The analysts forecast the economy will grow 3.08 percent this year and 3.65 percent in 2014.

’Managed Prices’

Finance Minister Guido Mantega said yesterday that inflation is under control. The government’s reduction of power rates for consumers that came into effect in January lowered electricity costs 13.5 percent in the month through mid-February and provided the largest downward pressure on inflation, 0.45 percentage points, the statistics agency said.

“You can make a lot of adjustments in managed prices like gasoline prices and electricity rates, but at the end of the day what matters is the rate of service inflation,” Pedro Tuesta, chief economist at 4Cast Inc., said by telephone from Washington.

Tuesta estimates services inflation is running at 8.5 percent to 9 percent due to demand created by a strong labor market and real wage increases. Unemployment fell to a record 4.6 percent in December.

Brazil isn’t lacking in demand and now must address its supply-side issues, policies for which “take longer to bear fruit,” central bank president Alexandre Tombini said yesterday in Urbana, Illinois.

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